May 1 (Bloomberg) -- The dollar climbed from a 10-week low
against the yen after a U.S. factory gauge unexpectedly advanced
in April, easing concern the economic recovery is flagging and
damping bets the Federal Reserve will introduce more stimulus.

The greenback rose from the lowest in almost a month
against the euro as the data highlighted a divergence between
U.S. economic performance and that of Europe, where reports over
the past week showed the U.K. and Spain have fallen into
recession. Australia’s dollar slid versus all of its major peers
after the nation’s central bank cut interest rates more than
forecast. The pound fell after U.K. factory growth slowed.

“This move may simply reflect the fact the probability of
quantitative easing has been materially reduced in light of the
better economic performance,” said Michael Woolfolk, senior
currency strategist in New York at Bank of New York Mellon
Corp., the world’s largest custodial bank. “Today is fruitful
grounds for speculation.”

The U.S. currency gained 0.3 percent to 80.09 yen at 5 p.m.
New York time after falling earlier to 79.64, the weakest level
since Feb. 21. It was little changed at $1.3237 per euro after
weakening 0.3 percent earlier to $1.3284, the lowest since April
3, and gaining as much as 0.3 percent. Europe’s 17-nation
currency gained 0.3 percent to 106.02 yen.

Markets in western Europe, except the U.K., Ireland and
Denmark, were closed for the May Day holiday. Most Asian markets
were also closed for public holidays.

Dollar Index

Intercontinental Exchange Inc.’s Dollar Index, which
measures the greenback against the currencies of six major U.S.
trade partners, added as much as 0.1 percent to 78.977 before
paring its advance to 78.815.

The Institute for Supply Management’s index of U.S.
manufacturing rose to 54.8 in April, the highest since June,
from 53.4 a month earlier, the Tempe, Arizona-based group’s
report showed. Economists in a Bloomberg survey forecast a
decline to 53. Readings greater than 50 signal growth.

The dollar reversed its earlier drop against the yen as the
data reduced bets the Fed will print more dollars to promote
economic growth.

While the central bank refrained at a two-day meeting last
week from new actions to boost the economy, Chairman Ben S.
Bernanke said it’s “prepared to do more” if necessary. The Fed
bought $2.3 trillion of bonds in two rounds of quantitative
easing from December 2008 to June 2011 to lower borrowing costs.
The Dollar Index fell 14 percent during that period.

Mexico’s peso was the biggest winner among the dollar’s 16
most-traded counterparts tracked by Bloomberg, and Canada’s
dollar also advanced after the ISM data. The U.S. is the biggest
trading partner of both nations.

‘Two Channels’

“In general, positive developments for the U.S. economy are
going to help the Canadian dollar,” Greg Anderson, the North
American head of G-10 currency strategy at Citigroup Inc. in New
York, said in a telephone interview. The Canadian currency is
helped “through two channels: improved risk appetite and
improved sentiment toward North America specifically.”

The peso strengthened 0.7 percent to 12.9162 per dollar,
and the Canadian currency advanced 0.2 percent to 98.54 cents to
the greenback.

Canada’s dollar was the second best performer among 10
developed nations over the past six months after the New Zealand
dollar, according to Bloomberg Correlation-Weighted Indexes,
rising 3.7 percent. The U.S. dollar gained 0.6 percent, and the
kiwi strengthened 3.9 percent.

European Manufacturing

A euro-zone manufacturing and services gauge dropped to
47.4 in April from 49.1 in March, London-based Markit Economics
said last week. A purchasing-manager index of German
manufacturing fell to 46.3 for April, from 48.4 in March.

Sterling weakened versus the dollar after data based on a
survey by Markit Economics and the Chartered Institute of
Purchasing and Supply showed U.K. factory output fell to 50.5 in
April from 51.9 in March. Data last week showed Britain’s
economy re-entered a recession last quarter.

The pound declined as much as 0.3 percent to $1.6187 before
trading little changed at 1.6221. It was little changed at 81.61
pence per euro after falling as much as 0.5 percent earlier.
Sterling appreciated yesterday to 81.23 pence, the strongest
since June 2010.

“The PMI data clearly weighed on sterling,” said Jane
Foley, a senior currency strategist at Rabobank International in
London. “There’s some clear profit-taking in sterling, as it’s
come a long way against both the euro and dollar.”

Spanish GDP

A report yesterday showed Spain’s gross domestic product
fell 0.3 percent in the first quarter, the same as in the
previous three months, marking the nation’s second recession
since 2009.

The U.S. economy grew at an annual pace of 2.2 percent in
the first three months of the year, after expanding 3 percent in
the fourth quarter, a report showed last week.

American employers added 161,000 jobs in April, up from
120,000 the previous month, according to a Bloomberg survey
before the Labor Department reports the data on May 4.

The Aussie dollar dropped for a second day against the
greenback after the Reserve Bank of Australia lowered its
overnight cash rate target to 3.75 percent from 4.25 percent,
the deepest cut in three years.

The Australian currency slid 0.9 percent to $1.0334 and
touched $1.0305, the lowest level since April 24.

The greenback will probably extend losses versus the yen
after it completed a so-called dead-cross formation with its
four-week moving average dropping below its 13-week line, Bank
of Tokyo-Mitsubishi UFJ Ltd analysts wrote in a note. The U.S.
currency may target the 26-week moving average, they wrote. That
level lies at 79.23 yen, according to data compiled by
Bloomberg.

The implied volatility of three-month options on Group of
Seven nations’ currencies rose to 9.15 percent today after
reaching 8.84 percent yesterday, the lowest intraday level since
November 2007. The average over the past decade is 10.6 percent.